Projecting your Financial Nugget

One of the first steps on your path to Financial Independence is working out how much you will need to save to make that a reality.  This is primarily driven by your assumed expenditure rate.  Reducing this will reduce the total you need to save and bring FI closer.

Then we can look at when we expect to accumulate the required financial nugget, by doing some projections (i.e. bugger about in Excel for a bit).  This allows us estimate the number of years until we can escape the Horde and join the others who have already made the journey to the Mall of Financial Independence (it seems the gods of FI are not without a sense of irony).  Attaching a date to a goal this behemoth makes it seem more attainable.

Categories
For me, have split the projections into 3 categories and have an assumed annual rate of growth for each.  Pensions & equities (together assume they follow the same equity growth), cash and property.  Including inflation and wage growth, this gives us 5 input assumptions we can play around with.

Assumptions

The other assumptions will be the monthly additions to pensions, equity outside the pension, property (i.e. the capital repayment on the mortgage) and cash.  I have assumed that I will carry on saving at the same current rate to make things simple (hopefully in reality we would get payrises above inflation and be able to save more as we aren’t sukkas who succumb to lifestyle inflation).

I don’t have any bonds or bond funds at the moment so I haven’t included this category, but I plan to at some point.

Some other very interesting points
  • This is for just me.  Mrs Z will be beavering away and saving as well.
  • The pension contributions are buoyed by company contributions and tax relief.
  • I have assumed that savings will carry on as they currently are, but in reality I would not carry on allocating to cash too much more.  
  • Hopefully the assumptions are reasonably prudent, e.g. salary growing in line with inflation.
  • We have a pretty good mortgage rate and so don’t overpay as we get more of a return on investments than we pay in interest.  If this changed (i.e. base rates go up) then savings would reduce and overpayments would start.  
  • It’s been kept simple.  There’s nothing in there for a potential house move, share option maturity, kids etc.  But, shut up, it’s a start.

Inflation

In my projections I take inflation away from the rate of growth so everything is in real terms, the bad ass way of projecting.  So real equity growth is 7% – 2% = 5%.
You might prefer to work in nominal terms (the non bad ass way).

The targets
This has been broken down into 4 different targets, so it doesn’t feel too much like a long slog towards one goal. 

The first is the point at which your investments would be theoretically making you £100 a month, at 4%.  All those little £-legends you have been saving will feel like they are starting to make a difference at this point.  Compounding is starting to take effect.  (I still find it strange how making £40 in interest a month feels epic, yet you can still spend £40 on a night out and not always make the connection that just saving that £40 is the same thing)
The second is the what I currently think would make me FI (although the Frugal Wizards out there could do far better I’m sure).  At 4% my investments would be banging out a cool £10k a year, there is definite potential to become FI at this point.  Who knows if you would actually have the balls to make the jump at this point.
The third is a lot more comfortable but it seems a massive target to aim for.  Having a couple of targets to smash through before this should help with motivation.
And the fourth is just there because £1million sounds awesome.  And it would be epic to be a millionaire driving about in a 1995 Skoda Felica.

The Projections
For the purpose of hitting these targets I think you should remove value of the pension fund and residential property, although I did include them out of interest.

Here are my projections, or the “The Oracle of Truth”;

The projections politely inform me that I would reach the targets;
Target 1 – 1 year 4 months
Target 2 – 14 years
Target 3 – 26 years
Target 4 – 33 years (Just make it by 65!)
If I was to include the company pension it would speed things up a fair bit, the first target would be already met and the second would be met in 6 years.  But that’s cheating 🙂

The second target is the real focus for now, and 14 years seems a long way off.

Looking at the numbers above it’s a worrying having so much money tied into a company pension scheme that you have limited control over.  But the company contributions and tax relief are too enticing for the moment.

It would be nice to reduce that second target within 10 years.  Doing a quick goal seek and to achieve this without increasing my savings would need an annual return of 15%.  So just a stellar year, every year for the next 10.  Easy.  Or I would need to find another £490 a month and fling that at the market.

I prefer to err on the side of prudence with projections, so hopefully targets would be reached easier than this.

Going forwards
The plan is to find ways to cut back on my expenditure to increase the amount saved and bring forward the target dates.  Afterall, having some more little fellas working away for me in my financial nugget is better than a new motorbike anyway.

Projecting your investments like this is a good way to set targets, but should be eyed with a degree of suspicion that’s normally reserved for a man rooting through your bins.  Just by creating a projection of your investments you don’t normally suddenly gain control of Mr Market, he is far too powerful for that.  The projections do provide away for us to monitor our progress towards goals but are by no means a crystal ball and so should be reviewed and updated.

I don’t think this needs to be too often, maybe twice a year to see how things are progressing (or after a significant event, moving house or a big market crash).


I could include Mrs Z in here as well, but I wanted to keep this personal.  Just me and Mr Market.

Are the assumptions too optimistic or prudent?  Would you add anything else or is relative simplicity key?  Are exercises like this a waste of time?

Spend less, save more, escape the Horde.

Mr Z

7 thoughts on “Projecting your Financial Nugget

  1. Financial Independence UK

    You may have been too prudent, but it depends on if you want to take out some capital or not (looks like you are assuming not at the moment), but bear in mind you will need much more capital and therefore have to work longer if you are not going to draw down.

    I have done a spreadsheet which shows I could escape wage slavery at 57 with around £350k (Mr Market permitting). Based on needing £2,000 per month, if I average 6% growth a year with 2.5% inflation I would use up my capital when I am 86. This would leave me with my state pension and a moderate final salary pension to live on. My personal view is that I would like to escape the wage slavery as soon as possible and while I am as fit as possible in order to enjoy the time available. In order to do this I would be prepared to cut my standard of living at 86 rather than work an extra 8 years to ensure my capital doesn't run out and then leave lots of cash behind.

    The main thing is that you are starting at an early age and therefore have plenty of time for compound interest to work its magic.

    Best Wishes
    FI UK

    Reply
  2. Cerridwen

    Hi

    Nice analysis. I understand why you aren't keen on including your pension as an asset at the moment due to the fact that it isn't available to you yet, but as soon as it does become available you've hit (and passed) Target 4 so you can afford to do a bit of jiggling about.

    As FI UK says the trick is to work out how much you will need to fund your early retirement (which is quite tricky as at your age as you don't even know at what age the legislation will allow you to access your pension – best guess at the moment would probably be 58 I reckon).You need to somehow assess how much capital you will need, given the age at which you want to stop work, to give you that £10,000 a year but only up until you can start drawing your pension – not forgetting that you will need to have paid enough into your pension at this point that (when combined with the state pension) it will fund the £10,000 pa

    I'm aiming at stopping work at 58, deferring my DB Local Government pension so that I can take it unreduced at 63, and funding my living costs from my SIPP and an old FSAVC to fund the 5 years before my pension is payable. But I'm much closer to retirement than you so it's easier to have well defined targets.

    I agree with FI UK – your age is your most valuable asset. Good luck 🙂

    Reply
  3. Mr Zombie

    Hey,

    Thanks for your thoughts. Agree that the assumptions are very prudent, but hopefully that will spur me on to save harder (and not just be demotivating!).

    The plan would be to use the investments until the DC pension would be available to top it up or replace it.

    It would be good to not touch the capital at all, but that's just the prudence in me.

    Reply
  4. Mr Zombie

    Hello,

    Thanks for the comments. Very true about the pension, and the unknown age of being able to use it is a big risk. Def more work to do around figuring out exactly how much would be needed in the period between going for it and being able to access the DC pension.

    As you say targets should get a bit easier to define as things get closer and the income being generated is nearer an FI providing a month :-).

    Sounds good! Must be nice having FI so close 😉

    Reply
  5. Living cheap in London

    Love it! i have a similar spreadsheet trying to untangle my family future! I have an extra column considering lump sum & pension income too.

    Reply
  6. Living cheap in London

    Hi,

    The tinkering is frequent, but just around the edges really. Our main numbers are pretty fixed. The main tinkering is considering our annual outgoings & what that means for the exit strategy.

    Our property equity, having bought in London 12 years ago, is, frankly, insane, but must be totally disregarded as we have no plans to leave London.

    Reply

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